Banning state firms won't fix China's property market

China’s latest initiative to rein in the real estate market is targeting one key driver behind its blistering growth: leading state-owned enterprises (SOEs).

The country’s state assets regulator – the State-owned Assets Supervision and Administration Commission (SASAC) – has told 78 central government-owned companies that fall under its jurisdiction to withdraw from the property industry. Only 16 SOEs, each of which can count real estate as its core business, can remain.

But will banning some SOEs from property development really bring prices down? The answer is probably not.

Property sales by central government-owned firms amounted to US$32.4 billion in value and 28.07 million square meters in volume last year – 5% and 3% respectively of the national total. Furthermore, the 78 companies that will be forced to exit the market accounted for just 15% of sales made by SOEs under central government control.

The rationale behind the government edict appears to stem from widespread criticism of cash-rich SOEs for bloating land prices to record levels in major cities: if you decrease the number of land bidders you will ease competition. The problem with this approach is that land prices tend to hinge on prices of nearby housing, not how many developers participate in the bidding.

Beijing may also be trying to appease privately-owned developers, who feel they have been muscled out of the market by SOEs that enjoy easier access to credit by virtue of strong relationships with commercial banks. If so, then the directive is little more than symbolic: The most active SOEs are those whose primary focus is real estate, and they won’t be going away.

There has been no shortage of policies intended to deal with price bubbles in the property market. In recent months China has raised deposit requirements for buyers at land auctions, increased banks’ reserve requirements twice and re-imposed a tax on home sales. Nevertheless, urban housing prices jumped 10.7% in February, the fastest pace in 23 months.

Answering the central government’s call, the China Banking Regulatory Commission followed up by instructing banks not to lend to developers found to have held land without building houses.

Admittedly, the banking regulator’s order was as much a response to concerns that commercial lenders may be at risk from developers that are raising capital speculatively – real estate loans still account for a big proportion of banks’ total credit – as it was to concerns about excessive price growth.

Analysts have more faith in these measures than those targeting the SOE involvement in land auctions. They argue that the real reason behind high land prices is insufficient supply – and this ultimately harms consumers who end up paying more for their homes.

Local governments must take the responsibility here by shoring up supply through the construction of more low-cost housing for rent and purchase. They rely on land sales for a large chunk of their revenues; doesn’t it make sense to use some of this money to provide homes for those most disenfranchised by the current setup?

Shao Ning, vice director of SASAC, has suggested as much. In addition to defending land auctions as infinitely preferable to the previous system of under-the-table deals, Shao called for a mechanism – mandated and overseen by the central government – that transfers the proceeds of land sales to ordinary people.

The most effective means of doing this would be a central government edict instructing local authorities to set aside a certain amount of their incomes for affordable housing. Big cities are already making progress on this count. For example, Shanghai wants to put low-income homes on 60% of the total space earmarked for new housing this year – 12 million square meters.

However, this doesn’t mean everyone who needs affordable housing will get it. Affordable housing programs mainly cover budget homes and low-rent apartments reserved for low-income families as well as houses built people who are relocated under urban redevelopment plans.

To qualify in Shanghai, a family must have a per capita monthly income of no more than RMB960 (US$140) and financial assets not exceeding RMB120,000. The city’s average monthly salary last year passed RMB3,500 and average housing prices were more than RMB20,000 per sq m.

More must be done to provide a wider variety of affordable homes for the likes of recent university graduates and the elderly people.

Government action is required to redress the balance between demand and supply in China’s property market – but placing controls on land prices and curbing speculative purchases will have little immediate impact on people’s standard of living.

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